The concept of paying over time is not new but the payment method has received a makeover. Learn how buy now, pay later is changing retail payments.
Buy now, pay later, or “BNPL”, is surging in popularity, and it may be a reflection of the future direction of retail payments. Consumers now have a range of BNPL providers at their fingertips, including large payments companies like PayPal along with BNPL-specific providers like Affirm, Afterpay, and Klarna. By allowing shoppers to pay for purchases over time, BNPL is empowering consumers with more flexibility in how they pay.
The popularity of this payment method has been accelerated by the pandemic, which has left many on stricter budgets. That, paired with the increase in online shopping, has made BNPL a payment method of choice among many consumers, especially younger generations that may be more credit-averse. Bankrate reports that only 33% of millennials have a credit card, and many are looking to installment loans like BNPL for added convenience and flexibility.
BNPL is not a new concept. Many are familiar with the more dated concept of layaway, where a retailer would reserve an item for a customer while they make payments. Once the item was paid for in full, the customer was able to receive the item. BNPL is similar in the way it enables installment payments; however, customers benefit by enjoying the item right away rather than having to wait until they’ve completed payment in full.
In many ways, BNPL options mimic credit cards but they spare consumers the high-interest rates. Consumers agree to pay the total sum in a series of installments, via the BNPL provider. So long as they make on-time payments, consumers are not charged any additional fees. On the backend, BNPL providers pay the full sum to the merchant at the point of sale, assuming the risk of payment collection.
Consumers are increasingly opting for these interest-free payments instead of credit and other loans. McKinsey reports that BNPL services have diverted $8-$10 billion in annual revenues away from banks and predicts that their market share will double from 7% in 2019 to 13-15% by 2023.
When a consumer makes a purchase through a BNPL provider, the provider pays the full sum upfront to the merchant and assumes the risk of future payments. Merchants accept payments as they would any other, paying transaction fees to the BNPL provider instead of a credit card issuer. The difference is that BNPL purchases may actually impact consumer behavior, making them especially valuable to merchants.
Offering installment loan options can help drive conversion as it makes many purchases more affordable for consumers. Additionally, studies have shown that consumers are likely to spend more when purchasing through BNPL; RBC Capital Markets estimates that a BNPL option increases conversion by up to 30% and increases average basket size between 30-50%.
This has resulted in competition for merchant partnerships: Affirm has partnered with Amazon and Shopify, while Square has acquired Afterpay and will integrate it into its point-of-sale. Although the fees-per-transaction are higher than with a traditional credit card payment, merchants are often willing to trade this in exchange for higher conversions and Average Order Value (AOV).
While BNPL has been mostly a business-to-consumer (B2C) phenomenon, it may play a significant role for B2B businesses, too. In many ways, the B2B sector has been utilizing an old form of BNPL for decades. Most suppliers must wait months to be paid and agree to payment terms ranging anywhere from 30 to 120+ days – in essence, a “credit” transaction. As it stands, this method largely benefits corporations that enjoy the financial benefit of increased working capital by delaying payments. The result is that suppliers set higher prices for their goods to make up for this gap in payment collection.
This is where Sell Now, Paid Now (SNPN) can be an innovating force for B2B, despite being the traditional form of B2C commerce. With SNPN, a third party fronts the cost of the purchase, rather than the buyer taking out a “free loan” from the supplier. Through new predictive and machine learning technology, the third party can assess which transactions are likely to be risky and decline them. In the unlikely event that the goods are faulty, the transaction can be refunded as with consumer purchases. Meanwhile, the buyer can retain their cash flow and the supplier can get paid immediately.
While the B2B aspect of BNPL looks different, there are lessons to be gleaned from the consumer side of things. BNPL is likely here to stay — at least for a while. The impacts of B2C continue to play out as the world looks on to see whether this payment method does more to harm or help consumers and businesses.
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